UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED
September 30, 2007
Commission File Number
0-2525
Huntington Bancshares Incorporated
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Maryland |
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31-0724920 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number
(614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past
90 days. [x] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer [x]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
[ ] Yes [x] No
There were 365,898,439 shares of Registrant’s common stock ($0.01 par value) outstanding on
September 30, 2007.
Huntington Bancshares Incorporated
INDEX
2
Part 1. Financial Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding
company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our
subsidiaries, including our bank subsidiary, The Huntington National Bank (the Bank), organized in
1866, we provide full-service commercial and consumer banking services, mortgage banking services,
automobile financing, equipment leasing, investment management, trust services, brokerage services,
reinsurance of private mortgage insurance, reinsurance of credit life and disability insurance, and
other insurance and financial products and services. Our banking offices are located in Ohio,
Michigan, Indiana, Pennsylvania, West Virginia, and Kentucky. Selected financial service
activities are also conducted in other states including: Dealer Sales offices in Arizona, Florida,
Georgia, Nevada, New Jersey, New York, North Carolina, South Carolina, and Tennessee; Private
Financial and Capital Markets Group offices in Florida; and Mortgage Banking offices in Maryland
and New Jersey. Sky Insurance offers retail and commercial insurance agency services, through
offices in Ohio, Pennsylvania, and Indiana. International banking services are available
through the headquarters office in Columbus and a limited purpose office located in both the
Cayman Islands and Hong Kong.
The following discussion and analysis provides you with information we believe necessary for
understanding our financial condition, changes in financial condition, results of operations, and
cash flows and should be read in conjunction with the financial statements, notes, and other
information contained in this report. The Management’s Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) appearing in our 2006 Annual Report on Form 10-K (2006
Form 10-K), as updated by the information contained in this report, should be read in conjunction
with this discussion and analysis.
Our discussion is divided into key segments:
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Introduction
- Provides overview comments on important matters including risk
factors, acquisitions, and other items. These are essential for understanding our
performance and prospects.
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Discussion of Results of Operations
- Reviews financial performance from a
consolidated company perspective. It also includes a Significant Items Influencing
Financial Performance Comparisons section that summarizes key issues helpful for
understanding performance trends. Key consolidated balance sheet and income statement
trends are also discussed in this section.
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Risk Management and Capital
- Discusses credit, market, liquidity, and operational
risks, including how these are managed, as well as performance trends. It also includes a
discussion of liquidity policies, how we fund ourselves, and related performance. In
addition, there is a discussion of guarantees and/or commitments made for items such as
standby letters of credit and commitments to sell loans, and a discussion that reviews the
adequacy of capital, including regulatory capital requirements.
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Lines of Business Discussion
- Provides an overview of financial performance for each
of our major lines of business and provides additional discussion of trends underlying
consolidated financial performance.
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Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements, including certain
plans, expectations, goals, and projections, and including statements about the benefits of the
merger between Huntington and Sky Financial, which are subject to numerous assumptions, risks, and
uncertainties.
Actual results could differ materially from those contained or implied by such statements for
a variety of factors including: the expected merger efficiencies and any revenue synergies from the
merger may not be fully realized within the expected timeframes; disruption from the merger may
make it more difficult to maintain relationships with clients, associates, or suppliers; changes in
economic conditions; movements in interest rates; competitive pressures on product pricing and
services; success and timing of other business strategies; the nature, extent, and timing of
governmental actions and reforms; and extended disruption of vital infrastructure. Additional
factors that could cause results to differ materially
3
from those described above can be found in
our 2006 Annual Report on Form 10-K, and documents subsequently filed with the Securities and
Exchange Commission (SEC).
All forward-looking statements speak only as of the date they are made. We assume no
obligation to update forward-looking statements to reflect circumstances or events that occur after
the date the forward-looking statements were made or to reflect the occurrence of unanticipated
events except as required by federal securities laws.
Risk Factors
We, like other financial companies, are subject to a number of risks, many of which are
outside of our direct control, though efforts are made to manage those risks while optimizing
returns. Among the risks assumed are: (1)
credit risk
, which is the risk that loan and
lease customers or other counter parties will be unable to perform their contractual obligations,
(2)
market risk
, which is the risk that changes in market rates and prices will adversely
affect our financial condition or results of operation, (3)
liquidity risk
, which is the
risk that we, or the Bank, will have insufficient cash or access to cash to meet operating needs,
and (4)
operational risk
, which is the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events
.
Refer to the ‘Risk Management and
Capital’ section for additional information regarding risk factors. Additionally, more information
on risk is set forth under the heading “Risk Factors” included in Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2006, and subsequent filings with the SEC.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The preparation of financial statements in conformity with
GAAP requires us to establish critical accounting policies and make accounting estimates,
assumptions, and judgments that affect amounts recorded and reported in our financial statements.
Note 1 of the Notes to Consolidated Financial Statements included in our 2006 Form 10-K as
supplemented by this report lists significant accounting policies we use in the development and
presentation of our financial statements. This discussion and analysis, the significant accounting
policies, and other financial statement disclosures identify and address key variables and other
qualitative and quantitative factors necessary for an understanding and evaluation of our company,
financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material
effect on the financial statements if a different amount within a range of estimates were used or
if estimates changed from period to period. Readers of this report should understand that estimates
are made under facts and circumstances at a point in time, and changes in those facts and
circumstances could produce actual results that differ from when those estimates were made.
Acquisition of Sky Financial
The merger with Sky Financial Group Inc. (Sky Financial) was completed on July 1, 2007. At
the time of acquisition, Sky Financial had assets of $16.8 billion, including $13.3 billion of
loans, and total deposits of $12.9 billion. Sky Financial results were fully included in our
consolidated results for the full 2007 third quarter, and will impact all quarters thereafter.
Additionally, during the 2007 third quarter, Sky Bank and Sky Trust, National Association (“Sky
Trust”), merged into the Bank and systems
integration was completed. As a result, performance comparisons of 2007 third quarter and
2007 nine-month performance to prior periods are affected as Sky Financial results were not
included in the prior periods. Comparisons of the 2007 third quarter and 2007 nine-month
performance compared with prior periods are impacted as follows:
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Increased the absolute level of reported average balance sheet, revenue,
expense, and the absolute level of certain credit quality results (e.g., amount of
net charge-offs).
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Increased the absolute level of reported non-interest expense items because
of costs incurred as part of merger integration activities, most notably employee
retention bonuses, outside programming services related to systems conversions,
occupancy expenses, and marketing expenses related to customer retention initiatives.
These net merger costs were $32.3 million in the 2007 third quarter.
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Given the significant impact of the merger on reported 2007 results, we believe that an
understanding of the impacts of the merger is necessary to understand better underlying performance
trends. When comparing post-merger period results to premerger periods, we use the following terms
when discussing financial performance:
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“Merger related” refers to amounts and percentage changes representing the
impact attributable to the merger.
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“Merger costs” represent non-interest expenses primarily associated with
merger integration activities.
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“Non-merger related” refers to performance not attributable to the merger and
include:
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“Merger efficiencies”, which represent non-interest expense
reductions realized as a result of the merger.
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The following methodology has been implemented to estimate the approximate effect of the Sky
Financial merger used to determine “merger-related” impacts.
Balance Sheet Items
For loans and leases, as well as total deposits, Sky Financial’s balances as of June 30,
2007, adjusted for purchase accounting adjustments, and transfers of loans to loans
held-for-sale, are used in the comparison. To estimate the impact on 2007 third quarter
average balances, it was assumed that the June 30, 2007 balances, as adjusted, remained
constant throughout the 2007 third quarter and will remain constant in all subsequent
periods.
Income Statement Items
For income statement line items, Sky Financial’s actual results for the first six months of
2007, adjusted for the impact of unusual items and purchase accounting adjustments, were
determined. This six-month adjusted amount was divided by two to estimate a quarterly
amount. This results in an approximate quarterly impact, as the methodology does not
adjust for any unusual items, market related changes, or seasonal factors in Sky
Financial’s 2007 six-month results. Nor does it consider any revenue or expense synergies
realized since the merger date. This same estimated amount will also be used in all
subsequent quarterly reporting periods. The one
exception to this methodology of holding the estimated quarterly impact constant relates to
the amortization of intangibles expense where the amount is known and is therefore used.
Certain tables contained within our discussion and analysis provide detail of changes to
reported results to quantify the estimated impact of the Sky Financial merger using this methodology.
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It
also includes a Significant Items Influencing Financial Performance Comparisons section that
summarizes key issues important for a complete understanding of performance trends. Key
consolidated balance sheet and income statement trends are discussed in this section. All earnings
per share data are reported on a diluted basis. For additional insight on financial performance,
please read this section in conjunction with the Lines of Business Discussion.
Summary
We reported 2007 third quarter net income of $138.2 million and earnings per common share of
$0.38. These results compared favorably to net income of $80.5 million and earnings per common
share of $0.34 in the 2007 second quarter, but declined from net income of $157.4 million and
earnings per common share of $0.65 in the third quarter of 2006. Our year-to-date net income was
$314.4 million, or $1.12 per common share, down from net income of $373.5 million, or $1.56 per
common share, in the comparable year-ago period. Additionally, comparisons with the prior year are impacted by the benefits for income taxes and balance sheet restructuring charges in the comparable year-ago period.
Period-to-period comparisons are significantly
impacted by the Sky Financial acquisition, which closed on July 1, 2007. The acquisition
solidified our position in Ohio, greatly expanded our presence in the Indianapolis market, and
established western Pennsylvania as a new market. Customer reaction has been very positive, and we
continue to work to ensure that all of the growth opportunities afforded by the acquisition are
realized.
Expense control was a major highlight for the quarter. Although non-interest expense
increased $140.9 million from the prior quarter, $161.3 million of the increase was merger related,
either through merger related expenses or increased merger costs. Non-merger related expenses
actually declined $20.4 million and represented most of the merger efficiencies that we targeted
from the acquisition. We expect to achieve most of the remaining benefit next quarter. Our
efficiency
5
ratio, which has been a key focal point for us, is approaching our targeted range, and
we expect to be within, or very near, that range, once we achieve the remaining targeted merger
efficiencies.
Fee income performance was mixed for the quarter. In addition to the increase in non-interest
income that was merger related, non-merger related deposit service charges and other service
charges showed very good growth, however, non-merger related trust services, mortgage banking, and
brokerage and insurance income were down.
Net interest income for the third quarter of 2007 increased $156.2 million from the prior
quarter. The current quarter included three months of net interest income attributable to the
acquisition of Sky Financial, which added $12.8 billion of loans, net of transfers to loans
held-for-sale and purchase
accounting adjustment, and $12.9 billion of deposits at July 1, 2007. During the current
quarter, we saw good growth in non-merger related commercial loans and certain consumer loans,
however, average automobile leases continued to shrink, as expected, due to low consumer demand and
competitive pricing. Additionally, the lack of growth in non-merger related average home equity
loans and average residential real estate loans continued to reflect the softness in the real
estate markets. Growth in non-merger related average total deposits was also good during the
quarter, driven by strong growth in interest-bearing demand deposits and money market accounts.
Our net interest margin was 3.52%, consistent with expectations and up from 3.26% in the second quarter,
primarily merger related.
Consistent with expectations, overall credit quality was stable during the quarter. The
allowance for loan and leases losses (ALLL) was 1.14% of total loans, down slightly from 1.15% at
June 30, 2007. The ALLL coverage of nonperforming loans (NPLs) improved to 182% at September 30,
2007, from 145% at June 30, 2007, and declined from 189% at December 31, 2006. However,
nonperforming assets (NPAs) increased $173.9 million from the prior quarter as we acquired $144.5
million of NPAs from Sky Financial. Additionally, we designated $16.3 million of impaired
asset-backed securities as other NPAs. During the quarter, non-merger related NPLs and
other-real-estate-owned (OREO) grew $13.0 million. Our outlook remains for NPLs to rise modestly
in the 2007 fourth quarter, as there remains pressure on businesses and consumers in our markets.
Market conditions remain difficult and we do not expect that to change in the near future. We
anticipate that the economic environment will continue to be negatively impacted by weakness in
residential real estate markets and negative impacts from the on-going challenges in the automotive
manufacturing and supplier sector. We expect our greatest impacts to be in our eastern Michigan
and northern Ohio markets.
Significant Items
Certain components of the income statement are naturally subject to more volatility than
others. As a result, readers of this report may view such items differently in their assessment of
“underlying” or “core” earnings performance compared with their expectations and/or any implications resulting from them on their
assessment of future performance trends.
Therefore, we believe the disclosure of certain “Significant Items” in current and prior
period results aids readers of this report in better understanding corporate performance so that
they can ascertain for themselves what, if any, items they may wish to include or exclude from
their analysis of performance, within the context of determining how that performance differed from
their expectations, as well as how, if at all, to adjust their estimates of future performance
accordingly.
To this end, we have adopted a practice of listing as “Significant Items” in our external
disclosure documents (including earnings press releases, investor presentations, Forms 10-Q and
10-K) individual and/or particularly volatile items that impact the current period results by $0.01
per share or more. Such “Significant Items” generally fall within one of two categories: timing
differences and other items.
Timing Differences
Part of our regular business activities are by their nature volatile, including capital
markets income and sales of loans. While such items may generally be expected to occur within a
full year reporting period, they may vary significantly from period to period. Such items are also
typically a component of an income statement line item and not, therefore, readily discernable. By
specifically disclosing such items, analysts/investors can better assess how, if at all, to adjust
their estimates of future performance.
6
Other Items
From time to time an event or transaction might significantly impact revenues, expenses, or
taxes in a particular reporting period that are judged to be unusual, short-term in nature, and/or
materially outside typically expected performance. Examples would be (1) merger costs, including
restructuring charges and asset valuation adjustments, as they
typically impact expenses for only a few quarters during the period
of transition; (2) changes in an accounting principle; (3)
unusual tax assessments or refunds; (4) a large gain/loss on the sale of an asset; (5) outsized
commercial loan net charge-offs; and other items deemed significant. By disclosing such items,
analysts/investors can better assess how, if at all, to adjust their estimates of future
performance.
Provision for Credit Losses
While
the provision for credit losses may vary significantly among periods, and often exceeds $0.01 per
share, we typically exclude it
from the list of significant items unless, in our view, there is a significant, specific credit (or
multiple significant, specific credits) affecting comparability among periods. In determining
whether any portion of the provision for credit losses should be included as a significant item, we
consider, among other things, that the provision is a major income statement caption rather than a component of another caption and, therefore, the
period-to-period variance can be readily determined.
Other Exclusions
“Significant Items” for any particular period are not intended to be a complete list of items
that may significantly impact future periods. A number of factors, including those described in
Huntington’s 2006 Annual Report on Form 10-K and other factors described from time to time in
Huntington’s other filings with the SEC, could also significantly impact future periods.
7
Table 1 — Selected Quarterly Income Statement Data
(1), (7)
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2007
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2006
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(in thousands, except per share amounts)
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Third
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Second
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First
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Fourth
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Third
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Interest income
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$
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851,155
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$
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542,461
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$
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534,949
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$
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544,841
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$
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538,988
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Interest expense
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441,522
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289,070
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279,394
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286,852
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283,675
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Net interest income
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409,633
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253,391
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255,555
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257,989
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255,313
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Provision for credit losses
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42,007
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60,133
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29,406
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15,744
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14,162
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Net interest income after provision for credit losses
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367,626
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193,258
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226,149
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242,245
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241,151
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Service charges on deposit accounts
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78,107
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50,017
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44,793
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48,548
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48,718
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Trust services
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33,562
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26,764
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25,894
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23,511
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22,490
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Brokerage and insurance income
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28,806
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17,199
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16,082
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14,600
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14,697
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Other service charges and fees
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21,045
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14,923
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13,208
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13,784
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12,989
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Bank owned life insurance income
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14,847
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10,904
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10,851
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10,804
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12,125
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Mortgage banking income
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9,629
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7,122
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9,351
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6,169
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8,512
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Securities (losses) gains
(2)
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(13,152
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(5,139
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104
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(15,804
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(57,332
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Other income
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31,830
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34,403
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24,894
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38,994
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35,711
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Total non-interest income
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204,674
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156,193
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145,177
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140,606
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97,910
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Personnel costs
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202,148
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135,191
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134,639
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137,944
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133,823
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Outside data processing and other services
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40,600
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25,701
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21,814
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20,695
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18,664
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Net occupancy
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33,334
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19,417
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19,908
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17,279
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18,109
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Equipment
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23,290
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17,157
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18,219
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18,151
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17,249
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Marketing
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13,186
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8,986
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7,696
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6,207
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7,846
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Professional services
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11,273
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8,101
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6,482
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8,958
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6,438
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Telecommunications
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7,286
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4,577
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4,126
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4,619
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4,818
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Printing and supplies
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4,743
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3,672
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3,242
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3,610
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3,416
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Amortization of intangibles
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19,949
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2,519
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2,520
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2,993
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2,902
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Other expense
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29,754
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19,334
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23,426
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47,334
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29,165
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Total non-interest expense
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385,563
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244,655
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242,072
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267,790
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242,430
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Income before income taxes
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186,737
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104,796
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129,254
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115,061
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96,631
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Provision (benefit) for income taxes
(3)
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48,535
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24,275
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33,528
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27,346
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(60,815
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Net income
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$
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138,202
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$
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80,521
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$
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95,726
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$
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87,715
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$
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157,446
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|
|
|
|
|
Average common shares — diluted
|
|
|
368,280
|
|
|
|
239,008
|
|
|
|
238,754
|
|
|
|
239,881
|
|
|
|
240,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income — diluted
|
|
$
|
0.38
|
|
|
$
|
0.34
|
|
|
$
|
0.40
|
|
|
$
|
0.37
|
|
|
$
|
0.65
|
|
|
Cash dividends declared
|
|
|
0.265
|
|
|
|
0.265
|
|
|
|
0.265
|
|
|
|
0.250
|
|
|
|
0.250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets
|
|
|
1.02
|
%
|
|
|
0.92
|
%
|
|
|
1.11
|
%
|
|
|
0.98
|
%
|
|
|
1.75
|
%
|
|
Return on average total shareholders’ equity
|
|
|
8.8
|
|
|
|
10.6
|
|
|
|
12.9
|
|
|
|
11.3
|
|
|
|
21.0
|
|
|
Return on average tangible shareholder’s equity
(4)
|
|
|
20.9
|
|
|
|
13.6
|
|
|
|
16.5
|
|
|
|
14.5
|
|
|
|
27.1
|
|
|
Net interest margin
(5)
|
|
|
3.52
|
|
|
|
3.26
|
|
|
|
3.36
|
|
|
|
3.28
|
|
|
|
3.22
|
|
|
Efficiency ratio
(6)
|
|
|
57.7
|
|
|
|
57.8
|
|
|
|
59.2
|
|
|
|
63.3
|
|
|
|
57.8
|
|
|
Effective tax rate
(3)
|
|
|
26.0
|
|
|
|
23.2
|
|
|
|
25.9
|
|
|
|
23.8
|
|
|
|
(62.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue — fully taxable equivalent (FTE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
409,633
|
|
|
$
|
253,391
|
|
|
$
|
255,555
|
|
|
$
|
257,989
|
|
|
$
|
255,313
|
|
|
FTE adjustment
|
|
|
5,712
|
|
|
|
4,127
|
|
|
|
4,047
|
|
|
|
4,115
|
|
|
|
4,090
|
|
|
|
|
|
|
Net interest income
(5)
|
|
|
415,345
|
|
|
|
257,518
|
|
|
|
259,602
|
|
|
|
262,104
|
|
|
|
259,403
|
|
|
Non-interest income
|
|
|
204,674
|
|
|
|
156,193
|
|
|
|
145,177
|
|
|
|
140,606
|
|
|
|
97,910
|
|
|
|
|
|
|
Total revenue
(5)
|
|
$
|
620,019
|
|
|
$
|
413,711
|
|
|
$
|
404,779
|
|
|
$
|
402,710
|
|
|
$
|
357,313
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Comparisons for presented periods are impacted by a number of factors. Refer to the
‘Significant Items Influencing Financial Performance Comparisons’ for additional discussion
regarding these key factors.
|
|
|
|
(2)
|
|
Includes $57.5 million of securities impairment losses for the 2006 third quarter.
|
|
|
|
(3)
|
|
The third quarter of 2006 includes $84.5 million benefit reflecting the resolution of a federal
income tax audit of tax years 2002 and 2003, as well as the recognition of federal tax loss carry
backs.
|
|
|
|
(4)
|
|
Net income less expense of amortization of intangibles (net of tax) for the period divided by
average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals
average total common shareholders’ equity less average intangible assets and goodwill.
|
|
|
|
(5)
|
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
|
|
|
|
(6)
|
|
Non-interest expense less amortization of intangibles divided by the sum of FTE net interest
income and non-interest income excluding securities gains (losses).
|
|
|
|
(7)
|
|
On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the balances
presented include the impact of the acquisition from that date.
|
8
Table 2 — Selected Year to Date Income Statement Data
(1), (7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Change
|
|
|
(in thousands, except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,928,565
|
|
|
$
|
1,525,678
|
|
|
$
|
402,887
|
|
|
|
26.4
|
%
|
|
Interest expense
|
|
|
1,009,986
|
|
|
|
764,490
|
|
|
|
245,496
|
|
|
|
32.1
|
|
|
|
|
|
|
Net interest income
|
|
|
918,579
|
|
|
|
761,188
|
|
|
|
157,391
|
|
|
|
20.7
|
|
|
Provision for credit losses
|
|
|
131,546
|
|
|
|
49,447
|
|
|
|
82,099
|
|
|
|
N.M.
|
|
|
|
|
|
|
Net interest income after provision for credit losses
|
|
|
787,033
|
|
|
|
711,741
|
|
|
|
75,292
|
|
|
|
10.6
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
172,917
|
|
|
|
137,165
|
|
|
|
35,752
|
|
|
|
26.1
|
|
|
Trust services
|
|
|
86,220
|
|
|
|
66,444
|
|
|
|
19,776
|
|
|
|
29.8
|
|
|
Brokerage and insurance income
|
|
|
62,087
|
|
|
|
44,235
|
|
|
|
17,852
|
|
|
|
40.4
|
|
|
Other service charges and fees
|
|
|
49,176
|
|
|
|
37,570
|
|
|
|
11,606
|
|
|
|
30.9
|
|
|
Bank owned life insurance income
|
|
|
36,602
|
|
|
|
32,971
|
|
|
|
3,631
|
|
|
|
11.0
|
|
|
Mortgage banking income
|
|
|
26,102
|
|
|
|
35,322
|
|
|
|
(9,220
|
)
|
|
|
(26.1
|
)
|
|
Securities losses
(2)
|
|
|
(18,187
|
)
|
|
|
(57,387
|
)
|
|
|
39,200
|
|
|
|
(68.3
|
)
|
|
Other income
|
|
|
91,127
|
|
|
|
124,143
|
|
|
|
(33,016
|
)
|
|
|
(26.6
|
)
|
|
|
|
|
|
Total non-interest income
|
|
|
506,044
|
|
|
|
420,463
|
|
|
|
85,581
|
|
|
|
20.4
|
|
|
|
|
|
|
Personnel costs
|
|
|
471,978
|
|
|
|
403,284
|
|
|
|
68,694
|
|
|
|
17.0
|
|
|
Outside data processing and other services
|
|
|
88,115
|
|
|
|
58,084
|
|
|
|
30,031
|
|
|
|
51.7
|
|
|
Net occupancy
|
|
|
72,659
|
|
|
|
54,002
|
|
|
|
18,657
|
|
|
|
34.5
|
|
|
Equipment
|
|
|
58,666
|
|
|
|
51,761
|
|
|
|
6,905
|
|
|
|
13.3
|
|
|
Marketing
|
|
|
29,868
|
|
|
|
25,521
|
|
|
|
4,347
|
|
|
|
17.0
|
|
|
Professional services
|
|
|
25,856
|
|
|
|
18,095
|
|
|
|
7,761
|
|
|
|
42.9
|
|
|
Telecommunications
|
|
|
15,989
|
|
|
|
14,633
|
|
|
|
1,356
|
|
|
|
9.3
|
|
|
Printing and supplies
|
|
|
11,657
|
|
|
|
10,254
|
|
|
|
1,403
|
|
|
|
13.7
|
|
|
Amortization of intangibles
|
|
|
24,988
|
|
|
|
6,969
|
|
|
|
18,019
|
|
|
|
N.M.
|
|
|
Other expense
|
|
|
72,514
|
|
|
|
90,601
|
|
|
|
(18,087
|
)
|
|
|
(20.0
|
)
|
|
|
|
|
|
Total non-interest expense
|
|
|
872,290
|
|
|
|
733,204
|
|
|
|
139,086
|
|
|
|
19.0
|
|
|
|
|
|
|
Income before income taxes
|
|
|
420,787
|
|
|
|
399,000
|
|
|
|
21,787
|
|
|
|
5.5
|
|
|
Provision for income taxes
(3)
|
|
|
106,338
|
|
|
|
25,494
|
|
|
|
80,844
|
|
|
|
N.M.
|
|
|
|
|
|
|
Net income
|
|
$
|
314,449
|
|
|
$
|
373,506
|
|
|
$
|
(59,057
|
)
|
|
|
(15.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares — diluted
|
|
|
282,014
|
|
|
|
239,933
|
|
|
|
42,081
|
|
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share — diluted
|
|
$
|
1.12
|
|
|
$
|
1.56
|
|
|
$
|
(0.44
|
)
|
|
|
(28.2)
|
%
|
|
Cash dividends declared
|
|
|
0.795
|
|
|
|
0.750
|
|
|
|
0.045
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets
|
|
|
1.02
|
%
|
|
|
1.43
|
%
|
|
|
(0.41
|
)
|
|
|
(28.7)
|
%
|
|
Return on average total shareholders’ equity
|
|
|
10.3
|
|
|
|
17.2
|
|
|
|
(6.9
|
)
|
|
|
(40.1
|
)
|
|
Return on average tangible shareholders’ equity
(4)
|
|
|
17.3
|
|
|
|
21.5
|
|
|
|
(4.2
|
)
|
|
|
(19.5
|
)
|
|
Net interest margin
(5)
|
|
|
3.40
|
|
|
|
3.29
|
|
|
|
0.11
|
|
|
|
3.3
|
|
|
Efficiency ratio
(6)
|
|
|
58.2
|
|
|
|
58.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
Effective tax rate
(3)
|
|
|
25.3
|
|
|
|
6.4
|
|
|
|
18.9
|
|
|
|
N.M.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue — fully taxable equivalent (FTE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
918,578
|
|
|
$
|
761,188
|
|
|
$
|
157,390
|
|
|
|
20.7
|
%
|
|
FTE adjustment
(5)
|
|
|
13,886
|
|
|
|
11,910
|
|
|
|
1,976
|
|
|
|
16.6
|
|
|
|
|
|
|
Net interest income
|
|
|
932,464
|
|
|
|
773,098
|
|
|
|
159,366
|
|
|
|
20.6
|
|
|
Non-interest income
|
|
|
506,046
|
|
|
|
420,463
|
|
|
|
85,583
|
|
|
|
20.4
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,438,510
|
|
|
$
|
1,193,561
|
|
|
$
|
244,949
|
|
|
|
20.5
|
%
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
|
|
|
|
|
|
(1)
|
|
Comparisons for presented periods are impacted by a number of factors. Refer to the
‘Significant Items Influencing Financial Performance Comparisons’ for additional discussion
regarding these key factors.
|
|
|
|
(2)
|
|
Includes $57.5 million of securities impairment losses for the 2006 third quarter.
|
|
|
|
(3)
|
|
The third quarter of 2006 includes $84.5 million benefit reflecting the resolution of a
federal income tax audit of tax years 2002 and 2003, as well as the recognition of federal tax
loss carry backs.
|
|
|
|
(4)
|
|
Net income less expense of amortization of intangibles (net of tax) for the period divided by
average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals
average total common shareholders’ equity less average intangible assets and goodwill.
|
|
|
|
(5)
|
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
|
|
|
|
(6)
|
|
Non-interest expense less amortization of intangibles divided by the sum of FTE net interest
income and non-interest income excluding securities gains/(losses).
|
|
|
|
(7)
|
|
On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the balances
presented include the impact of the acquisition from that date.
|
9
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons from the beginning of 2006 through the third quarter of 2007 were
impacted by a number of significant items summarized below.
|
|
1.
|
|
Sky Financial Acquisition.
The merger with Sky Financial was completed on July 1,
2007. At the time of acquisition, Sky Financial had assets of $16.8 billion, including
$13.3 billion of loans, and total deposits of $12.9 billion. Sky Financial results are
reflected in our consolidated results beginning July 1, 2007. The impacts of the affected
quarterly and year-to-date reported results compared with premerger reporting periods are
as follows:
|
|
|
•
|
|
Increased the absolute level of reported average balance sheet, revenue, expense,
and credit quality results (for example, net charge-offs).
|
|
|
|
|
•
|
|
Increased reported non-interest expense items as a result of costs incurred as
part of merger integration activities, most notably employee retention bonuses,
outside programming services related to systems conversions, and marketing expenses
related to customer retention initiatives. These net merger costs were $0.8 million
in the 2007 first quarter, $7.6 million in the 2007 second quarter, and $32.3 million
in the 2007 third quarter.
|
|
|
2.
|
|
Balance Sheet Restructuring
. In third and fourth quarters of 2006, we utilized the
excess capital resulting from the third quarter’s significant reduction to federal tax
expense (see Item 6 below) to restructure certain under-performing components of our
balance sheet. Total securities losses as a result of these actions totaled $73.3
million. The refinancing of Federal Home Loan Bank (FHLB) funding and the sale of mortgage
loans resulted in total charges of $4.4 million, resulting in total balance sheet
restructuring costs of $77.7 million ($0.21 per common share). Our actions impacted 2006
third and fourth quarter results as follows:
|
|
|
•
|
|
$57.3 million pretax ($0.16 per common share) negative impact in the 2006 third
quarter from securities impairment. Subsequent to the end of the quarter, we initiated
a review of our investment securities portfolio. The objective of this review was to
reposition the portfolio to optimize performance in light of changing economic
conditions and other factors. A total of $2.1 billion of securities, primarily
consisting of U.S. Treasury, agency securities, and mortgage-backed securities, as
well as certain other asset-backed securities, were identified as
other-than-temporarily impaired as a result of this review.
|
|
|
|
|
•
|
|
$20.2 million pretax ($13.1 million after tax or $0.05 per common share) negative
impact in the 2006 fourth quarter related to costs associated with the completion of
the balance sheet restructuring. This consisted of $9.0 million pretax of investment
securities losses as well as
$6.8 million of additional impairment on certain asset-backed securities not included
in the restructuring recognized in the third quarter, and $4.4 million pretax of other
balance sheet restructuring expenses, most notably FHLB funding refinancing costs.
|
10
|
3.
|
|
Mortgage servicing rights (MSRs) and related hedging.
Included in net market related
losses are net losses or gains from our mortgage servicing rights and the related hedging.
MSR fair values are very sensitive to movements in interest rates as expected future net
servicing income depends on the projected outstanding principal balances of the underlying
loans, which can be greatly reduced by prepayments. Prepayments usually increase when
mortgage interest rates decline and decrease when mortgage interest rates rise. A hedging
strategy is used to minimize the impact from MSR fair value changes. However, volatile
changes in interest rates can diminish the effectiveness of these hedges. We typically
report MSR fair value adjustments net of hedge-related trading activity. Net income
included the following net impact of MSR hedging activity
(reference Table 11)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
interest
|
|
|
interest
|
|
|
Pretax
|
|
|
Net
|
|
|
Common
|
|
|
Period
|
|
income
|
|
|
income
|
|
|
income
|
|
|
income
|
|
|
Share
|
|
|
1Q ‘07
|
|
$
|
—
|
|
|
$
|
(2,018
|
)
|
|
$
|
(2,018
|
)
|
|
$
|
(1,312
|
)
|
|
$
|
(0.01
|
)
|
|
2Q ‘07
|
|
|
248
|
|
|
|
(4,998
|
)
|
|
|
(4,750
|
)
|
|
|
(3,088
|
)
|
|
|
(0.01
|
)
|
|
3Q ‘07
|
|
|
2,357
|
|
|
|
(6,002
|
)
|
|
|
(3,645
|
)
|
|
|
(2,369
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|